Long Term Business Loans: Your Complete Guide

The benefits of long-term business loans, like an SBA loan with a 10-year term, can help you expand your business.

Long-term debt consists of loans and other financial obligations lasting over one year. Terms of long-term debt can stretch to 20 or 30 years depending on the individual lender and use of funds. Long term loans have another advantage: low monthly payments. This gives a business plenty of time to grow, increase income, and repay the loan.

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Here’s what you need to know if you’re seeking funds to grow your business or save money.

What are long-term business loans?

Long-term business loans are a form of business financing with repayment terms of at least 12 months. Most long-term financing options offer repayment periods of three to 10 years, though longer terms – up to 25 years – are available.

The primary distinguishing features of long-term business loans are their length. They otherwise mostly resemble other loans: You’ll repay your loan in monthly installments, with interest, over time. Your loan’s permissible uses will vary based on the provider, as will the required qualifications. Some long-term business loans might be inaccessible to borrowers with bad credit histories, and others might solely permit funds usage toward equipment financing.

Benefits of long-term business loans

  • Build business credit

The SBA cites the inability to obtain funding as a leading cause of small business failure. Having excellent business credit is crucial to obtain long-term debt funding with low rates. If you have obtained long-term debt financing, you increase the likelihood of qualifying for additional funds. A 10-year term SBA loan from banks in the SmartBiz network can help your business build credit. As an added benefit, when you build your company’s credit, you reduce the need to rely on your personal credit.

To secure the lowest cost capital with the longest terms and manageable payments, keep your credit scores healthy. The SmartBiz Blog has a host of resources to help you understand and manage your credit scores:

Personal Credit Scores: Important when Seeking a Small Business Loan

FICO SBSS: What’s Your Business Credit Score?

  • Long-term debt fuels growth

Some growth-building uses of long-term debt include buying inventory or equipment, hiring new workers, increasing marketing, shoring up cash flow, and more. For articles about real SmartBiz customers who are growing with long-term SBA loans, visit the Business Story section of the SmartBiz Small Business Blog.

  • Long-term debt can save a small business money

Often, small business owners rely on expensive debt – like credit cards with sky-high rates or cash advances – to get their business off the ground. Unfortunately, this type of debt cuts into cash flow and can negatively affect day-to-day operations. A long-term loan can be used to help small business owners refinance existing high cost debt.

SmartBiz customer Milton Martinez used this strategy by taking out a low-cost SBA loan. He says, “By getting rid of two small loans I’m saving $15,000 – $18,000 dollars overall. That’s money I can put back into growing my business or into savings.”

  • Long-term debt can eliminate reliance on expensive debt

There are lenders who use aggressive sales tactics to get businesses to take out short-term cash advances. Some businesses in need of funds will take five or six cash advances in a row. These loans can trap a borrower into a dangerous debt cycle. Instead, consider a loan with low interest rates, long terms, and low monthly payments. Many SBA loans have no prepayment penalties. SBA loans can be used to help small business owners refinance existing high-cost debt if you’re caught in a trap.

Drawbacks of long-term business loans

  • Businesses must be established

A long-term loan might be out of reach if you are just getting started. SBA loans from banks in the SmartBiz network require 2 years of operation.

  • Rigorous approval process

More documentation may be required to show the overall financial health of your business. As such, the approval process for long-term loans may be longer than for a shorter-term loan. If you need funds quickly or want to jump on a business opportunity, a short term may be best. Qualifying may be difficult too: Lenders usually require strong credit scores and evidence that payments can be made in full on time for the life of the loan.

  • Collateral may be required

Collateral is something pledged as security for repayment of a loan, to be forfeited in the event of a default. In terms of the types of acceptable assets, these can include inventory, a personal possession, accounts receivable, equipment, real estate, machinery, and general intangibles that are not already held by another lender. Newer businesses may not have required collateral.

  • Interest rates

Though interest rates are often lower, the borrower may end up paying more in interest as the repayment term is much longer.

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Considerations for approval of a long-term loan

Before you seek small business funding, you should determine whether your financial circumstances indeed mean you qualify for a long-term loan. Doing so means looking at your financial history, your current finances, and how you’ll use your funding. It also means assessing your financial stake in your small business and verifying all your insurance plans. Learn how to handle all these steps below.

1. Examine your cash flow and credit scores

Lenders will examine your cash flow and operating expenses. Cash flow statements help small business owners identify liquidity, the strengths and weaknesses in terms of the cash flowing in and out of accounts. Do you have a steady business income that will ensure payments are timely? Lenders also strongly consider your business and personal credit.

2. Consider your track record

An established business with years of success will usually have an easier time obtaining long term business loans. A business that has struggled may find it harder to obtain business funding.

3. Assess your stake in the business

Lenders will want to see that an owner is personally invested in a business before approving a business loan. Some lenders may require that borrowers own a minimum percentage of the business in question. If you don’t meet this threshold, you could try applying for different types of loans or ask one of your co-owners to apply.

4. Prepare to present your planned use of the proceeds

The lender will want to know what this money is used for and why it’s needed, whether it’s for purchasing equipment or working capital or debt refinance. This part of applying for long-term business loans is especially important, as most loans limit how you can use their funds. Unlike credit cards, you can’t necessarily use loans freely. For example, you can’t use SBA microloans, to pay debts or buy commercial real estate. State your plans upfront to avoid issues.

5. Make sure your insurance is up to date

Lenders want to make sure a business is properly insured in case of fire, flood or similar losses. For insurance requirements you may need to meet, read this post from SmartBiz University: Evaluating Insurance Needs.

Types of Long-Term Business Loans

The long-term business loans offered to your company likely fall into one of three categories. Perhaps the most trustworthy type is SBA loans, which are most often associated with obtaining working capital. SBA loans are government-guaranteed, whereas bank term loans lack this assurance. So do alternative loans, which often come from online lenders whose rates and terms may be ideal if you don’t qualify for other loans.

Below is more information about each of these loan types, their amounts and terms, and other considerations.

1. SBA loans up to 10 years

SmartBiz provides U.S. Small Business Administration loans of up to $350,000 with a 10-year repayment term, which can make it easier to manage monthly payments. For example, a $100,000 loan with an 10% annual percentage rate would require monthly payments of $1,424 over 10 years, while the same loan with a five-year term would require monthly payments of $2,260.

To qualify, you’ll need to have been in business at least two years and earn at least $50,000 in annual revenue. You’ll also need a good personal credit score of 640 or higher for loans of $30,000 to $350,000. For commercial real estate, SBA loans from $500,000 to $5 million require a credit score above 675.

2. Bank loans up to 5-7 years

If you don’t qualify for an SBA loan or you want funding faster, consider a Bank Term loan* from a bank in the SmartBiz network. Bank Term loans are term loans meant to be repaid in a shorter amount of time than the 10-year term of a typical SBA loan. This type of loan can be a great way to get the funds you need to successfully grow or maintain your business until you are eligible for an SBA loan.

SmartBiz can help you apply for a Bank Term loan with fixed rates for working capital, debt refinance, new equipment purchase, and more. Amounts are available from $30,000 to $350,000.*

* Interest rate depends on loan term and the applicant's credit and financial profile.

3. Alternative business loans up to 5 years

If neither SBA loans nor bank term loans fit your long-term needs, you can turn to alternative lenders. Their long-term business loans typically have repayment terms of at most five years. You might need to sign a personal guarantee to secure your loan, though you likely won’t have to put up collateral. Either way, alternative loans are a valid option if your lower business income and credit score disqualify you from other options.

*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.

** The information provided through SmartBiz Advisor, including the Loan Ready Score™, is for educational purposes only. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

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